Brazil's Trade Balance deterioration is eerily similar to that of Indonesia (see note earlier today) with an annual surplus of just over $30 bln two years ago being eroded into a flat position over the last 12 months (see chart).

October saw a deficit of -$224 mln, compared to an expected surplus of $1.2 bln and a surplus of $1.65 bln in October 2011. This is the first October deficit since 2000 and it takes the trailing 12 month ma of the balance down to a mere $17 mln (just over $200 mln cumulative), its lowest position since late 2001. This suggests that the October Current Account deficit will continue to probe lower (the data will not be released until November 22nd) and act as a further drain on domestic liquidity conditions.

Although in Indonesia's case the cause for the deterioration has been a reduction in exports these have been relatively stable in Brazil, with the 12 month ma flat-lining at $20 bln in recent months and September's exports were $22.8 bln, an increase of 4.86% YoY. Imports grew to a new all time high of $23.04 bln an increase of 14.6% YoY. The 12 month ma remains in an increasing trend also reaching an all time high of $20.0 bln this month, up from $18.7 bln a year ago.

The ISM Manufacturing report for October, the first key data point for the month in which the Washington shutdown took place, shows no impact was felt by the manufacturing sector with the index rising to 56.4, its highest level since April 2011.

As we have explained before, the ISM is a diffusion index, which measures the change in conditions from one month to the next, means that you cannot strictly compare one reading to another across multiple quarters. In fact the current reading should respond to a greater degree of economic activity than the April 2011 reading given that it comes a further 30 months into the protracted recovery for the manufacturing sector.

Further encouragement comes from the fact that strength was well dispersed across sub-indexes. The New Order index rose slightly to 60.6, the 3rd consecutive month that this metric has been above 60 (again its best run since April 2011). We note that New Export Orders broke out to 57, the highest level since April 2012 and perhaps a sign of strengthening demand overseas as Europe recovers.

Production dipped slightly to 60.8 from 62.6 but has now remained above 60 for 4 straight months while Inventories grew modestly to 52.5, the first monthly re-build since June. Employment growth remained modest at 53.2 but in recent months this metric has been rather more positive than the dreary payroll statistics calculated by the BLS.

Of course much of this report had already been broadly anticipated by the strong rally in industrially focused equities in recent weeks, but this does not negate the encouraging message of this report which again underlines how far behind the curve US monetary policy has fallen.

After the trauma of their summer decline and subsequent partial recovery most EM carry currencies enjoyed a quiet start to the autumn. This period of calm looks to be drawing to a close with some significant break out in cross rates taking place over the last few sessions.

We note particularly weakness in the BRL (blue) and ZAR (green), the former of which had enjoyed the most impressive recovery in recent weeks, helped by a very large intervention in currency markets. Yesterday's news of a much wider than expected fiscal deficit seems to have undermined the rebuilt confidence and the BRL has fallen to 2.25, its weakest level since September 17th. The ZAR never enjoyed as strong a recovery but had at least been stable in recent months but this morning's sharp rise to 10.15 threatens to break the currency out of its recovery range and allow a full retest of the August high at 10.50.

Other important break-outs include the TRY (red), which broke through important resistance at the 2.00 level and coincident 50 day ma this morning to reach 2.017. The next key level is 2.05 and then the all time high of 2.08 recorded in early September. Indonesia's IDR (black line) tends to move in a staircase fashion (a sign of its illiquidity and heavy manipulation by the central bank) but again at 11335 looks to be moving up to test key resistance around the 11500 level. India's INR (orange) has recently been the most stable currency, a reflection of the fact that its equity market remains strongly in favor by international investors and also that its currency already adjusted by a greater degree than the others we track. However, should the weakness in other carry currencies continue to be felt we doubt that the INR will remain immune to the overall trend.

We continue to view the deterioration of a number of EM countries's trade positions and current accounts (which are of course closely linked) as one of the major factors behind their significant under-performance in recent quarters. Indonesia continued the string of poor data this morning with its September Trade Balance. This showed a deficit of -$657 mln, compared to an expected small surplus of $96 mln, which the August deficit was revised lower from -$72 to -$132. This takes the rolling 12 month ma down to -$745 mln, a new record for data that starts in 2008. We note that it is a slippage in exports which have been behind the widening deficit. These dropped by -6.8% YoY in September to $14.8 bln, taking the trailing 12 month ma down to $15.1 bln, compared to the March 2012 peak for this metric at $17.2 bln (see chart).

Although the current deficit clearly remains affordable, the size of the swing from the position enjoyed two years ago is really what matters. In the 12 months ending September 2011 the Trade Balance averaged a surplus of over $2.5 bln, or $30 bln over the entire 12 month period, compared to a deficit of -$9 bln over the prior 12 months. A swing of -$39 bln in annual trade is certainly significant for Indonesia and is one of the factors as to why the country's reserves stopped their relentless rise prior to the large currency interventions which took them lower this summer (see chart).

Brazil's fiscal position continues to erode steadily as costly government intervention runs ahead of tax collections. September saw a Nominal Budget Balance of -22.9b BRL, somewhat wider than the -19.3 bln anticipated. The primary cause was a very wide Primary Budget Balance of -9 bln (0.5 bln surplus expected) which was driven by an early pay-out of social security benefits, which one assumes will be followed by reduced expenditure later on this quarter. On the other hand the interest expense was about 6 bln BRL less than anticipated, which can be expected to be reflected in a future increase in expenses.

Whatever the specific issues in September's data were what cannot be denied is the clear deterioration in the trend of data. Over the last 12 months the cumulative nominal balance has dropped to a deficit of 155.5 bln BRL, compared to a level of 120.7 bln BRL a year ago (see chart) as the Primary Surplus (which excludes interest payments) has shrunk and interest costs have risen. YTD the deficit now represents -3.77% of GDP, the widest level seen since October 2009 when the data was greatly affected by the 2008/9 collapse. Should the deficit finish the year at this level it would represent the largest proportion of GDP since 2003 (see chart). Although a deficit of this degree is arguably sustainable it leaves little margin should a further slowing of economic activity pull tax receipts lower.

Ireland's Live Register of unemployed persons continues to drop rapidly from a very elevated level. October's data showed a -3.7K decrease, the 15th consecutive month of decline and the 12 month reduction has now reached -24.3K, the largest annual drop since April 2001. The register now lies at 409.9K, the lowest level since June 2009 although it remains far above the 150K level that was typical before the financial crisis. This at least means that further rapid progress can be anticipated going forwards and we would hope to see the psychologically important 400K level breached this quarter.

Interestingly there has been a much faster drop in youth unemployment in Ireland in recent months, with the Under 25 category falling to 64.4K, its lowest reading since November 2008. This takes this category's percentage of the total down to 15.1% (see chart) which is a record low since the data commenced in 1980. We suspect in part this very rapid decline is a result of increased labor mobility in the EU, allowing the younger population to look elsewhere for work opportunities. Although not without its social consequences this is a reminder of how some of the economic reforms enacted over the last 20 years have helped Europe craft a recovery in recent months.

Although emerging market currency markets have stabilized in recent weeks the fundamental deterioration of trade balances in a number of countries continues to point towards future vulnerability.

This morning saw the publication of September trade data for Turkey and South Africa, with both countries posting wider than expected deficits. In Turkey's case the trade gap widened to $7.5 bln, compared to consensus estimates of -$7.3 bln and September 2012's level of -$6.8 bln. This continues the eroding trend for Turkey's trade position, with the 12 month ma falling to -$7.88 bln, its lowest level since May 2012.

South Africa's deficit is considerably narrower at -18.9 bln ZAR (approximately -$1.9 bln) but the trend of deterioration is equally marked. Consensus called for -16.4 bln and a year ago the deficit was -13.8 bln. As recently as 2011 South Africa posted an annual trade surplus, compared to the current 12 month ma at -13.4 bln ZAR. The danger remains for both countries that any slowdown in capital inflows (let alone an actual resumption of the sort of outflows seen at the end of Q2) will start to place further strains on currency markets.

The Japanese housing market continues to show signs of accelerating activity with September housing starts reaching 1.044 mm units on a SAAR basis, well above expectations of 983K and August's 960K reading. This represents a 20.6% increase in activity YoY and takes the trailing 12 month ma up to 950K, its highest level since May 2009. A look at the NSA data confirms the strength of this report with the monthly total of 88.54K starts representing the strongest single month since October 2008.

Although we realize that some of this surge in activity has been caused by a rush to beat the proposed increase in sales tax in 2014 the strength in the data is not restricted to housing being built for sale but is also present in the rental data. This increased to 32.1K in September, an increase of 21.2% YoY and the strongest monthly data since January 2009. The fact that rental activity is also recovering strongly suggests that this is more than a rush to beat the tax-man, and that the Japanese housing market is finally recovering from 5 years of torpor.

After the major re-write of the FOMC statement at September meeting the text of this afternoon's release contains comparatively few changes, reflecting the fact that the decision to defer any reduction in bond purchases last month was always likely to be a multi-month affair. In addition the government shutdown meant somewhat less official data was available for perusal and those reports that were released were (even) less reliable than normal.

We have attached a red-lined version of the text (courtesy of Bloomberg ©) and as can be seen the majority of changes take place at the start of the communique. The outlook for the housing market was downgraded a little but perhaps the most interesting linguistic choice was to remove the controversial reference to the "tightening of financial conditions" as a risk to the recovery that was included last month.

There were three explanations offered by observers to the use of this term last month:

1. Ignorance

2. Conflation of Financial Conditions with the general level of interest rates (we note that the Chicago Fed's Financial Conditions Index contains a large input from underlying interest rates see link http://www.chicagofed.org/webpages/research/data/nfci/background.cfm ).

3. An implicit signal that the FOMC had been influenced by the (genuine) deterioration of financial conditions in a number of key emerging markets.

If we remove #1 as both impolite and highly unlikely given the large number of FRB staff who are paid to sit around looking at data, the remaining two explanations (which are not mutually exclusive) do offer an insight into the degree of the task that the FOMC has taken upon itself.

Over-emphasizing the significance of treasury yields removes the concept of a "benign" rise in interest rates, with no differentiation being made between a rise in treasury yields that steepens the curve and compresses credit spreads (even if nominal credit yields still rise), and one which is driven either by a sharp increase in short term yields and flattens the curve, or a rise of credit yields in which treasury yields either remain the same or actually decline. The first scenario is actually the typical back-drop for a strong economic recovery, the second for the period in which a central bank is adjusting policy to bring it into line with reality and the third a sign that monetary conditions are inappropriately tight. Under the Bernanke Doctrine instead we have a steadily strengthening economy with depression level treasury yields and relatively high credit spreads.

Regarding the influence of events within emerging markets we note that the extension of the FOMC's mandate into the international sphere arguably commenced in 2008 with the launch of the CBLS (a large scale provision of USD swap lines to a number of key EM central banks) and that this facility was used on a smaller scale in late 2011 to help the ECB control USD pricing at the height of the Eurocrisis. Nothing as dramatic took place over the summer months but the notion that the decision to maintain full bond purchases because of the stresses encountered in countries such as India and Brazil is somewhat surprising. Nevertheless the strains felt in financial conditions of emerging markets were clearly discussed in the truncated minutes of the September meeting and our assumption is that they were a factor in the decision to keep the current level of bond purchases in effect.

The removal of this language regarding financial conditions may therefore be an indication that the FOMC received some criticism over this issue or may instead reflect the fact that interest rates came back down in the US and most emerging markets have recovered a good portion of their summer losses. However, the fact that they did not choose to state that financial conditions have recovered but instead simply deleted the reference to them makes the former explanation a little more likely.

The rest of the text remains almost unchanged, with the promise that bond purchases will remain in place for a while longer and that the gap between tapering and an actual rise in interest rates will be lengthy. We continue to take issue with the latter, since we believe that the FOMC continues to underestimate both the speed with which employment conditions are improving and inflationary pressures are building. We do not doubt the honesty of the committee, merely its ability to accurately gauge the trajectory of an economic cycle which has consistently surprised it.

FOMC Statement Oct 30th 2013

The Lloyds Bank Commercial Business Barometer is a survey conducted with over 200 of the banks commercial customers tracking both current economic conditions and expectations. It is a diffusion index (in other words it records monthly improvement or deterioration rather than absolute levels) with the headline number representing the net percentage of positive or negative responses.

October saw the highest ever positive reading for the Current Conditions index at 63 (made up of 72% improving and 9% deteriorating), which represents another metric pointing to a robust UK recovery. This is the 14th consecutive positive reading and the 12 month ma of this metric has now reached 34, a level only surpassed during the initial "V" shaped rebound from the 2008/9 collapse.

Although this index tells us little about the absolute level of conditions we suspect these are fast approaching "normal" for many businesses and perhaps surpassing that in stronger areas of the economy. This clashes with the UK treasury market which still maintains a 10 year yield at a recessionary 2.56%, and monetary policy which combines a record low Base Rate with significant asset purchases.

Given the strong momentum in UK economic data we are starting to suspect that the UK treasury market could be the first to decouple itself from global markets by moving higher in response to strong economic data and that the BOE may be the first DM central bank to break with with the "Bernanke Doctrine" (we would expect the former to lead the latter) although it would probably take a clear upsurge in inflation data to cause the latter to take place.

Since the BLS employment report will not be released until the 2nd Friday of November this morning's ADP National Employment Report will perhaps have a little more time in the limelight than usual. The data showed an estimated 130K jobs added in October, below consensus expectations of 150K. However, given the natural volatility of this series and the fact that October activity will have had some impact from the Washington stand-off most observers will treat this as an in-line report (as can be seen by the limited response by US treasuries).

This keeps the 12 month ma almost unchanged at 172.1K, which remains about 18K below the average monthly level estimated by the BLS over the same period. We note that since its recalibration last year the ADP report has been consistently reporting lower numbers than the BLS. We do not ourselves favor one over the other from a methodological standpoint (they are both deeply flawed as real time signals, but more useful as longer term indicators of employment trends) but we would take into account the ADP reports consistent "under-reporting" of payroll gains when interpreting the data.

The after-effects of the government slowdown were clearly evident in the Conference Board Consumer Sentiment Index, which fell sharply to 71.2 in October from 80.2 in September (revised up from 79.7). Although this was somewhat lower than expectations of 75 given the clearly understandable cause of the decline it is hardly a cause for concern.

Indeed a similar wave of disgust followed the Fiscal Cliff debacle last January, when the index fell to 58.40 from 66.70. This didn't alter the trajectory of confidence which has been slowly building since the collapse of 2008/9 and by February the index had risen as high as 68. Given the transitory effect of the shutdown we would expect to see a similar rebound in confidence next month.

Perhaps the most interesting aspect of consumer confidence this cycle has been how muted it has been in the face of a strong bull market. October's poor reading was notable for taking place against the backdrop of the SPX forcing its way up to a new all time high (in January the SPX was recording a new six year high). Current levels of confidence are equivalent to that normally seen at the early stages of a bull market rather than the sort of giddy belief that accompanies major market tops.

The PBOC released its September 2013 balance sheet last night and although the data contains few surprises it acts as a reminder that credit growth continues to massively out-pace that of the monetary base. Total Assets grew by 226.5 bln CNY (0.73%), taking the annual growth rate down slightly to 7.43% from 8.02% last month. This represents something of a loosening from the static balance sheet of late 2012 but also a much tighter level of liquidity creation than we saw for much of the prior decade. In other words the PBOC has grown its balance sheet at very close to the stated target for GDP in recent months, perhaps a sign that the monetary base itself has become a key policy tool.

Of course credit growth can diverge from monetary growth for long periods of time (and in both directions as the FRB has discovered over the last five years). The official bank loan sector has been growing at over twice the pace of the central bank in recent months, while the shadow banking system has added an equivalent amount of credit into the system.

The two metrics we use to track this are the 12 month ma of total Social Financing compared to the size of the PBOC's balance sheet. This currently reads 4.99%, meaning that over the last 12 months total credit created has been equivalent to 60% of the PBOC's balance sheet (see chart). Although this is slightly lower than the readings seen in early 2013 it is still a remarkably high level, particularly since it follows the blowout readings of 2009/10.

We also track the ratio of the PBOC's balance sheet to total bank loans, and this fell to 0.4428 in September, the lowest level since October 2004. Of course nine years ago non-bank credit was a fraction of its current level, meaning that this ratio significantly underestimates the change in the relationship between total credit and total liquidity in the Chinese economy, although its direction remains an accurate reflection of the change in conditions.

Brazil's loan data for September hints at a moderation of lending by the State Sector banks, whose outstanding loans grew by 9.37 bln BRL (0.72%), the second slowest month since February 2012. Indeed for the first time in several quarters Private Sector bank lending grew by a larger amount, increasing 10.54 bln BRL (0.83%) but it is too early to be sure if this represents a change in the lending landscape or simply a one month blip.

Any slowdown by the state sector would be significant, since over the last couple of years this has been the dominant source of lending in the Brazilian economy, with a YoY growth rate of 26.5% compared to private sector lending growing at a 6.5% pace. As the attached chart shows this allowed the state sector to overtake private lending over the summer for the first time in modern history. We have voiced concern that this politically inspired growth has come at the cost of underwriting quality, with state banks apparently willing to extend credit in a manner that private banks had little appetite to match.

In terms of the sector breakdown there was little to report in the September data, once again Housing remains the most important driver of credit growth. Personal Credit grew by a modest 2.9 bln BRL (0.39%), while the delinquency rate of Personal Credit remained steady at 7.00%. With the unemployment rate now easing up and the credit growth rate slowing down we doubt whether much more progress will be made by delinquencies going forwards, and would not be surprised to see an up-tick in problem loans by the middle of next quarter.

The RBI acted in line with expectations last night, raising the REPO cut-off yield by 25 bp to 7.75%, its level between February and March this year, tightening monetary conditions for a local economy which is approaching stall speed. At the same time some relief was given to the financial sector, with the marginal standing facility rate (used by banks to access short term funding) dropped to 8.75% from 9.00%, which in turn eased some of the pressure on the local money market. Interbank rates now vary between 8.98% (overnight) and 9.22% (3 month) and while these levels are significantly higher than those prevailing earlier this year they also represent a big improvement from the "crisis" readings seen in August and early September.

The equity market liked these steps, with the SENSEX rallying 1.74% to close at 20,929, its highest close since November 2010. Including these gains the index is only up 7.73% YTD in local terms, and down 3.96% for a USD investor, underlining the substantial under-performance of Indian equities in recent months.

International investors remain very patient with Indian equities, with YTD flows recovering over the summer to reach $15.7 bln, above their May peak. Interestingly bond investors are acting very differently with total YTD outflows hitting -$7.9 bln, by far the largest removal of foreign capital on record. We assume this discrepancy has been caused by the substantial losses in the INR, which are of course much more problematic for bondholders (with fixed yields) than equities. This removal of capital has acted to further tighten monetary conditions, with bond issuance slowing to a trickle in recent months.

India to our eyes remains vulnerable to further economic deterioration, with high inflation and large fiscal and trade deficits. We do not deny that some progress has been made in terms of restoring market confidence in recent weeks but the problems remain daunting and the corporate opportunities rather more limited than across most of the developed world.

Ireland's housing market continued to experience a strong rebound in prices in September with the National Residential Price Index rising 1.8% MoM, its largest monthly rise since August 2006. This is the sixth successive monthly price gain and takes the annual gain up to 3.6%, its highest level since late 2007. Of course the actual level of prices differs greatly from 6 years ago, with the index reaching 68.2 in September, almost exactly half its peak value in the last cycle.

The key Dublin market continues to set the pace for the rest of the country with prices gaining by a record 3.9% in September and 12.3% YoY, the fastest annual pace since April 2007. Again we would note that prices are only 49% of their prior cycle peak, but even so this is a very rapid pace of repair that indicates a strong resurgence of demand for housing in the nation's capital.

The US Pending Home Sales report showed a surprisingly steep decline in transactions with the seasonally adjusted index falling from 105.8 to 101.6 when consensus had called for a flat report. This takes the index back to its level in late 2012, which while disappointing as a monthly report still represents a reasonable level of overall activity (January 2001 activity = 100).

If there is any solace to take out of report it is that the collapse in activity took place in September, which is seasonally much less important than the prior 4 months, each of which saw Pending Sales record multi-year highs (ignoring tax credit distortion). Thus the number of "lost" transactions is far smaller than would have been the case with a 5% draw-down in July or August, although its effect on the seasonally adjusted headline is the same (see charts).

We would also note that monthly draw-downs of this magnitude are not unknown during strong housing markets with August 2003 seeing a similar decline (down 5.2 points to 108.1), again following a steep rise in mortgage rates (the 30 year mortgage rate rose from a then record low 4.90% in mid-June to 6.10% at the start of August). We therefore would not read too much into this data other than confirming the fact that higher rates did alter buyer behavior this summer, with perhaps some purchases being rushed through in an attempt to lock in rates that we feared to be rising further.

A decade ago the housing market was to accelerate into a bubble despite the fact that the 2003 low in mortgage rates was not surpassed again that cycle (it took the economic collapse of 2008/9 to achieve that) and our view remains that the stresses caused by rising rates will prove to be transitory this time around as well. There is nothing unusual about a housing cycle pushing against the twin headwinds of rising prices and interest rates, and while sharp moves in either can alter the trajectory of recovery (particularly over the short term) they do not typically force market activity to trend lower until housing affordability becomes truly problematic.

Since there was little new data released overnight worth commenting on we will revisit an issue that garnered an awful lot of attention a few months ago, but now seems to have slipped off radar screens, namely the very rapid build up of NYSE margin debt that has taken place since the start of this powerful bull market.

Readers may recall that over the spring and early summer a large number of stories were written, sparked largely by the simple fact that in April outstanding NYSE margin debt had risen to a new all time high, breaking above both the level seen in at the March 2000 ($279 bln) and July 2007 ($381 bln) highs, each of which took place against a peaking bull market. The fact that outstanding NYSE margin then went on to post a modest 2% decline in May led some to conclude that the top for debt was in place and that the US equity market was likely to suffer a significant decline within a number of weeks.

We were resistant to this view at the time, and pointed out that although NYSE Margin debt and the US equity market do tend to peak within weeks of each other (for obvious reasons) there is nothing unusual about a long bull market taking margin much higher than its prior peak. Indeed making a new high in margin has normally been nothing more than an intermediate step along the way (see attached long term chart).

A few months later we can see this pattern playing out in the US, and after the spring hiatus we note that the last 3 months have seen a rise in outstanding margin, with September's strong rally being partly fueled by a robust $18.3 bln increase (4.78%) to a new record high of $401.2 bln. No doubt this new record will make some queasy, with the mantra that this build up is unsustainable and that it undermines the credentials of this bull market.

We beg to differ. The rapid rise in margin debt is a logical outcome of both the robust equity market (which has good fundamental underpinnings) and the very generous monetary conditions kept in place by the FRB. The effect of the latter is twofold, with both the price and quantity of money being radically altered and as we argued in the summer the sustainability of a credit surge is ultimately dependent on both these factors.

Regarding price, NYSE Broker call is the base rate for margin debt (borrowers will either pay a premium or receive a discount according to their credentials). Using this a a proxy for cost we can see that the total interest burden of current outstanding debt is $8.024 bln, less than a third of the July 2007 level of debt service at $26.695 and about 2.5 times less than the March 2000 level of $21.6 bln.

Regarding the quantity of money if we use M2 as a rough proxy we can see that the margin debt is currently 3.7% of total money stock, compared to 5.2% in July 2007 and 5.9% in March 2000 (we would see something similar if we used total bank deposits instead). In other words the current rapid build up of margin debt is actually quite sustainable, and moreover is likely to be sustained (which is not quite the same thing).

This is not to say we we welcome or applaud this process, but ultimately we are meant to be pragmatic observers (and participants) in the various investment cycles we encounter, and not fall into the moralist trap of bemoaning the perhaps less welcome consequences of a very powerful bull market.

Link:

www.bloomberg.com/video/bond-market-extremely-expensive-shaoul-says-oBBKkO3vRJa3vj1aum2eRA.html

Interview focuses on the relative value of the equity and bond market.

Attention towards Japan has become much more muted in recent months, in part because the torrid gains of early 2013 have been replaced by a duller range-bound market, but also because actual policy reform has proved more muted than some had hoped for.

We have always viewed the story differently, with monetary policy being the primary driver of our investment thesis together with an appreciation that Japan's primary motivation in following this reform is not economic but instead political. The country (or at least the newly elected administration) fears its economic irrelevance on the global scale is starting to become a diplomatic and even military handicap, a point made clear in the publication of its 2013 white paper on defense:
See link http://www.mod.go.jp/e/publ/w_paper/2013.html

For this reason we do not doubt the determination of the BoJ to see this policy through, and we are always great believers that given enough time monetary policy has extremely powerful effects. Fiscal reform and deregulation have a much spottier record, and while progress in either area would be a plus they are ultimately less important than the radical boost to domestic liquidity being undertaken by the BoJ.

One sign that this liquidity injection is having some effect is the turnaround in national CPI. This grew 1.1% YoY in September, the fastest annual pace since October 2008 (when soaring global oil prices rather than monetary policy were the catalyst). This compares with a -0.3% level a year ago, suggesting an important turning point in the inflationary cycle may have been delivered. The 12 month ma remains slightly negative at -0.1%, but this reflects data produced in late 2012 and early 2013. Monthly prices have increased every month since February and this slower moving metric can be expected to move into positive territory soon enough. Whether a trend towards higher prices can be sustained remains to be seen, but the fact that we have now moved into positive territory without any significant attention is an interesting development.

After the SHIBOR scare of early July China has had a relatively quiet summer, with most observers concluding that steady growth had resumed in the world's second largest economy. Our view over this period has been more nuanced; we recognized that the spike in concern was probably premature, but the scale of difficulty in navigating economic policy between the inflationary impulse of the local housing market, and the deflationary forces present elsewhere made it highly likely that China would be a source of market tension going forwards.

We therefore note with interest that both the local SHASHR index and offshore HSCEI index would appear to have de-coupled from the general recovery in emerging market equities in recent days, with both indexes falling below important support at their 50 day ma's. Interestingly this has been in part a response to another spike in money market rates, which have risen right up to the top of their normal range and are now threatening to break higher.

As was the case in July, the cause would appear to be a deliberate draining of liquidity from the REPO market by the PBOC. This follows the general pattern of the last two years in which credit has remained abundant (increasing in total by approximately $3 trn over the last 12 months) while actual liquidity available to the banking system has been much tighter.

It remains to be seen whether this episode will be allowed to proceed any further, or if the PBOC will start to add liquidity quickly to the money markets, but either way it is a reminder that China's capital markets remain in much more fragile state than those in the developed world.

Link to interview:

http://watch.bnn.ca/#clip1030291

Interview concentrates on equity and bond market comparing risk and opportunity in both.

We have always valued the weekly Initial claims report as giving a useful real-time snapshot of labor markets. It is therefore unfortunate that a combination of the government shutdown and computer problems in California (which is by far the largest state for this data) have served to distort reports since mid-September.

This week's report showed Claims of 350K, above estimations of 340K (for the reasons given above consensus was derived from an unusually wide dispersion of estimates), while last week's data was revised higher to 362K. This took the 4 week ma of Claims back up to 348.3, compared to a reading of 305K on September 27th, a number which was partially lowered by back-logged Californian claims which are now flooding the system. A sense of the scale of this issue is that during the summer California typically accounted for around 16% of total national Claims, and 13.6% of Claims for the week ending October 6th 2012, but supplied almost 24% in last week's report, suggesting that around 25-30K of total Claims were caused by the backlog.

Interestingly even with the impact of California and the Federal shutdown (no estimate was provided at the impact of the latter) the 4 week ma has only backed up to its level in July. Since both these issues will only have a temporary effect on the data this still suggests that a marked improvement in Claims took place over the summer, although perhaps not quite as significant as the giddy data released in early September. We will not have a reliable read on Claims data for a number of weeks but we would expect to see Claims settle somewhere between 300K and 320K sooner or later.

We would remind readers that this improvement has not been reflected in the relatively poor non-farm payroll data released since July, suggesting that some degree of catch-up is due by the latter. Of course the October non-farm payroll report will have to adjust for the Washington hiatus but sooner or later we would expect to see some significant upside employment reports.

http://blogs.wsj.com/economics/2013/10/23/dont-put-too-much-stock-in-one-jobs-report/

A very sensible piece that outlines the degree and sources of volatility in this over-watched data series. Well worth reading as a general reference piece.

The Brazilian Consumer Confidence index fell to 111.70 in October, a 2.5 point drop from its September level despite the recovery in the local equity market. As can be seen on the attached chart this keeps confidence towards the low end of its recent range, although it remains over 3 points higher than its July 2013 low of 108.3, which coincided with the abrupt sell off at the start of summer.

However, even that July reading could hardly be seen as the sort of deeply pessimistic reading that marks the end of a bear market. Even allowing for the natural optimism of Brazilian consumers we would expect confidence to be comfortably below 100 at the down point of an economic and market cycle, and we note that this measure was breached between October 2008 and April 2009, with the low point being 94.9 recorded in November and December.

The reason for the resilience of confidence is not hard to fathom, since the local government has done everything within its power to ensure that the pain of Brazil's economic slowdown has been felt by the corporate and investment sectors rather than Brazil's consumers. Unemployment has remained very low (partly because of Brazil's rigid labor laws that make lay-offs very difficult) and credit has continued to be freely available (aided by the generosity of the state controlled banks late into the economic cycle). Thus although confidence has lost the buoyancy of the boom years it remains far above a recessionary level.

Our view is that this is unlikely to remain true throughout the remainder of the down cycle, and that at some point significant pain will be felt by Brazil's consumers, and will be reflected by a sharply lower confidence reading. Paradoxically this outcome would signal better news for investors, since a few months of low confidence readings would be consistent with the bottoming of the down cycle. As it is we are not there yet and we would avoid the temptation to step back into Brazilian equities (particularly those focussed on local demand) at the current time.

UK mortgage approvals for September totaled 42.99K, well above expectations of 39.5K and the strongest single month for transactions since December 2009. This represents a 39.6% YoY increase in activity for September's single month data, and while this may overstate the underlying trend of improvement the 12 month ma has now recovered to reach 35.19K, its highest level since October 2010.

However, this does not tell the entire story; because home prices (particularly in London) have recovered meaningfully in recent quarters the value of approved transaction actually broke out to a 5½ year high in September of £6.666 bln, underlining the significance of this recovery to both the UK consumer and banking sectors. The 12 month ma of this metric rose to £5.456 bln, the highest level seen since July 2010, but if September's breakout can be sustained this metric will start to climb strongly into the end of the year.

One of the few silver linings to the Washington shutdown was the fact that we were saved the release of much of the government economic data but this morning saw the return of a dark cloud in the form of the September non-farm payroll report.

This data series has in recent months shown no obvious sign of improvement in contrast to a host of other employment metrics from both the public and private sector that suggested (at least through September) that the last 6 months have seen a notable uptick in labor demand. Unfortunately, the non-farm payroll report remains the "daddy of the data", setting the mood of the market (at least over the short term) and the terms of analysis within the Federal Reserve, despite the fact that there is no evidence that it supplies a more accurate reflection of current conditions than alternative measures such as Initial Claims.

The September BLS report estimated Total Additions to Payrolls at 148K, below expectations of 180K. August data was revised higher to 193K from 169K while the weak July report was revised lower from 104K to a scarcely credible 89K. Including net revisions of +9K this takes the data to within 25K of the consensus view, which is of course well within the error tolerance of this data. In other words whatever the immediate effect on the market's psychological make up there is little conclusion to draw from the data.

Private Sector Payrolls were estimated to have risen by only 126K, compared to 180K consensus. Hidden in this "miss" is the fact that the Public Sector has ceased to be a drag on overall employment - a notable change from the first four years of this recovery. Revisions to the last two months were -18K, taking the overall picture a little lower. On the other hand the trailing 12 month ma actually rose slightly as the poor September 2012 data dropped out of the calculation, with this metric now 191K. As can be seen on the attached chart there has been remarkably little change to the annual pace of job gains over the last three years, which is as good an argument as any for paying somewhat less attention to the monthly reports.

It is also interesting to note that the clear trend of improving Unemployment remains in effect, with the data falling to 7.2%, helped by a 133K gain on the Household Survey (the Participation Rate was unchanged at 63.2%). This takes this metric a little closer to the FOMC target of 6.5%, although we note that the committee has sought to distance itself from rigidly responding to this guideline in recent meetings.

In the normal course of a year we would expect better data to be released during Q4, which has significant seasonal tailwinds helping the report. This time around we will have the distortion from the shutdown to contend with, making the October and November reports even more of a lottery than normal. Our advice would be to simply move on from today's report and assume nothing major has changed, with perhaps the most important effect being that the bond market may have bought itself a little more time.

China continues to experience a broad housing boom which is unsurprising given that credit metrics continue to suggest a very rabid build up of private sector indebtedness.

September's data showed New Affordable Home Prices rose in 65 out of 70 surveyed cities (falling slightly from 66 last month), with only 2 cities experiencing falling MoM prices (unchanged). Existing Home prices rose in 63 cities (up from 58 last month) and fell in only 4 (5 last month), which is the strongest data seen since April at the start of the brief crackdown in shadow banking.

It is not just the consistency of the data that is remarkable but also the rate at which prices are increasing. Beijing (16%), Shanghai (17%), Shenzen (20%) and Guangzhou (20%) all experienced very sharp annual price increases in markets that were already fully priced a year ago. It remains to be seen at what point the PBOC will feel forced to react to this situation, but the fact that other portions of the Chinese economy (most obviously exports) would appear to be growing well under the GDP target rate, the temptation to allow a buoyant real estate market to continue to carry the strain would seem to be winning the policy argument.

Link:

www.bloomberg.com/video/s-p-500-can-hit-1-800-by-end-of-the-year-shaoul-Af81HuE6TkiUT9OX368xdA.html

Interview concentrates on US equity and bond market.

September's NAR report on Existing Home Sales showed a stabilizing of the housing market following the strong recovery of activity over the last two years. Total Sales were estimated at 5.29mm units almost exactly matching expectations, with August revised slightly lower to 5.39mm from 5.48mm units. This still keeps activity over 15% above its level of a year ago, while the trailing 12 month ma has risen to 5.06mm, its highest level since November 2007.

Activity in Single Family homes matched the overall picture with sales of 4.68mm representing a 10.9% YoY change, and the 12 month ma also reaching a 6 year high at 4.47mm units. In other words a strong trend of recovery has taken hold which has lifted the overall market back to a level equivalent to that of the healthy pre-boom housing market at the start of this century.

One slight change is the state of inventory which registered its first YoY rise in over two years. The rise was a modest 3.7% and at 1.96mm units overall inventory remains very low. However, it does now look as if the inventory cycle has finally bottomed with the 12 month ma flattening out at 1.82 mm units, the lowest level for this metric since December 2001. It should be noted that a rising inventory from a low level is quite normal for a strong existing home market, particularly if it reflects a willingness of homeowners (or lenders) to list houses that have seen prices recover back to where they can be sold for an acceptable sum. Indeed given that activity in certain markets has been held back by the availability of units it would not be a surprise in inventory and sales start to be positively correlated going forwards. Much later on inventory may become a sign of a housing market in over-supply, but we are nowhere near the sort of metrics seen at the peak of the last two housing booms.